Organisations moving processes and services to the cloud are bound to be thinking about the impact any move might have on staff rights. Employers know how existing regulations can apply to typical IT outsourcing, which often entails loss of employment or changes to staff terms and conditions, but may be wondering how those rules relate to the cloud.

With outsourcing, a series of cross-indemnities and related provisions in contracts offer protection against the automatic transfer of employees, including the costs of dismissals and changes to terms. But it is not yet clear how the existing traditional principles will apply in the context of the cloud.

In Europe, the Acquired Rights Directive (ARD) governs the automatic transfer of staff from one employer to another where there is considered to be a relevant transfer, regardless of contractual terms.

The ARD is implemented in the UK by the Transfer of Undertakings (Protection from Employment) Regulations 2006 (TUPE). If the ARD or TUPE is applied, employees automatically transfer to the new employer and receive enhanced protection against dismissal and changes to their terms and conditions.

Whether the ARD or TUPE applies when a company moves to the cloud comes down to whether there is a "relevant business transfer".

In a nutshell, this means the transfer of a business that continues in the same way after it has changed hands. TUPE goes a step further than the ARD to specify that a relevant transfer will also include a service-provision change, or SPC.

Service-provision changes

This type of change occurs when a customer reassigns a contract with a supplier to provide services or brings a certain service back inhouse. For an service-provision change to occur, there must be an organised group of employees based in Great Britain whose principal purpose is to carry out those activities on behalf of the client.

If there is a relevant transfer SPC, those employees assigned to the services will transfer. It must be employees who are dedicated to a specific service for a specific client. It will not be enough that an employee assists in providing the service by chance or because of a shift pattern or if they split their time evenly between different clients.

In debating whether the ARD and TUPE will apply to cloud services, on entry or on exit, the tests of whether there is a relevant transfer and who is assigned remain.

If, for example, the cloud provider's workforce is split evenly between working on different clients and it cannot be demonstrated that a particular group is assigned to providing a particular IT service to a certain client, it is unlikely that TUPE will apply on exit.

If, however, TUPE applies and the employees are assigned so that a cloud supplier has either to take on the legacy staff or carry the redundancy liability, this situation has the potential to challenge the economic basis of the deal.

Cloud suppliers may seek protection for any necessary redundancy costs as a contractual term. Equally, the customer may seek to include a contractual obligation for the supplier not to assign a specific group of employees to provide its services and to agree that TUPE will not apply on any exit.

Implications of offshore IT provision

An added complication caused by cloud is that the IT provision may now be coming from offshore. Provided there is an assigned group of employees based in Great Britain, TUPE can apply to a service-provision change, even if the service is subsequently provided offshore, and assigned employees will transfer.

Assignment may be more difficult to show where there is a public provision of cloud services, rather than a private agreement. Neither the ARD nor TUPE will of course apply if the client and the supplier - or old supplier and new supplier - do not have any employees based in Europe.

However, local equivalents could apply and should be checked. In addition, if they do not apply, the parties can always contractually agree that the employees will transfer or give the employees the opportunity to transfer.

At various points in the contract lifecycle, employers will have to consider whether resources have been transformed and whether a service is being delivered in a wholly different way. To determine whether staff transfer, they will also have to consider whether a particular group of employees has been specifically assigned to provide the services.

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About Jonathan Exten-Wright

Jonathan Exten-Wright is a partner at law firm DLA Piper and a specialist in employment law.